TAX LAW
The Estonian tax system includes seven national taxes: income tax, value-added tax, excise taxes, customs tax, social tax, gambling tax and land tax. Additionally, local municipalities may enforce certain local taxes in their territories that are of minor importance in comparison with the general tax burden.
Income tax
Key changes were introduced to the income tax regime in January of 2000.
Subject to specified exemptions, natural persons and non-residents continue to pay income tax on income earned (at a flat rate of 26%, regardless of the total income sum).
However, legal persons that are registered in Estonia (or have a registered branch or other permanent establishment in Estonia) no longer pay taxes on profits received; instead the new Income Tax Act focuses on the distribution of profits by such entities. Such legal persons pay income tax on dividends and other profit distributions paid out to natural persons or non-residents (note that dividends paid to resident legal persons are exempt from tax). This distribution tax also applies to transactions that can be treated as concealed profit distributions, such as fringe benefits, gifts, charitable donations and non business payments. All such distributions are taxed at a grossed-up rate of 26.74 (i.e. 35%) of the amount of taxable payment.
Dividends paid to non-residents are also liable to withholding tax at the general rate of 26% unless the non-resident is alegal entity holding at least 25% of the shares of the distributing Estonian company. Non resident legal entities owning more than 25% in an Estonian entity are specifically exempted from the withholding tax. Non residents holding less than a 25% stake in an Estonian company, or who are natural persons, may seek relief from the risk of double-taxation depending on whether their home jurisdiction has signed a Double Taxation Avoidance Treaty with Estonia (see the list of such treaties at the end of this brochure).
The objecive of the Estonian Income Tax Act is to foster economic development and significant foreign investment by exempting reinvested profit from income tax.
Value Added Tax
Value added tax is a compulsory 18% supplement to nearly all goods and services sold in Estonia, albeit a small number of goods and services are taxed at a 5% or 0% rate, or exempted altogether. The tax rate for exports is 0% rate, or exempted altogether. The tax rate for exports is 0%, but exported services that qualify for the reduced rate must be set out in a list established by the Ministry of Finance.
Taxpayers with turnover (not including imports) of less than 250,000 kroons per year are not required to register for VAT purposes, although they may voluntarily choose to do so.
Foreign companies that have bought goods and services in Estonia may apply for the return of the paid VAT if the acquired goods of services were not associated with a branch or permanent establishment of the non resident, and certain other conditions are complied with. These include the conditions that the non-resident be a registered VAT taxpayer in its home jurisdiction and that the home jurisdiction has granted reciprocal VAT refund rights to Estonian businesses.
(To be continued)
Estonian Business Law: A Comprehensive Summary (5)
Archived Articles | 14 Aug 2002 | EL (Estonian Life)EWR
Archived Articles
TRENDING
